29 Jan 2025
Interest rates play a pivotal role in shaping economic landscapes, and their fluctuations often hold significant implications for businesses, investors, and households. In New Zealand, recent months have seen a notable shift in interest rate trends, with the Reserve Bank of New Zealand (RBNZ) adopting a more accommodative stance. Understanding these changes and their impact is crucial for making informed financial decisions.
Over the past few months, the Official Cash Rate (OCR) has decreased by 1.25%, bringing it to 4.25%, with further reductions anticipated in the coming year. The RBNZ has signalled that the OCR could dip to around 3.25% by December 2025, marking a significant shift in monetary policy.
The broader macroeconomic impact of these changes is multifaceted. Lower interest rates can invigorate business investments and consumer spending by reducing the cost of borrowing. Additionally, they tend to decrease returns on savings products, prompting investors to explore alternative avenues for growth. While this environment presents opportunities, it also requires careful navigation to mitigate risks and maximise benefits.
For investors, this environment underscores the importance of understanding how fund managers, like PMG, adapt to lower borrowing costs to deliver sustainable value.
The role of interest rates on fund performance
Fund performance is directly influenced by the performance of its underlying portfolio. Key drivers of performance include income diversity (reducing reliance on a single tenant or property), the quality of the property portfolio (high-quality tenants and strong occupancy), and external elements such as bank borrowing levels and interest rates.
Lower interest rates directly impact borrowing costs, enabling PMG to allocate more cash flow toward investor distributions. This not only supports improved outcomes from an existing portfolio but also increases our ability to capitalise on new opportunities, with a view to driving optimal long-term value for investors.
Prudent financial management is central to our approach. We carefully evaluate the interplay of internal performance metrics and external market factors to ensure the portfolio performs as strongly as possible. This supports the long-term sustainability and stability of our funds while maintaining regular returns for investors.
What it means for investors and PMG’s funds
In the past two months, we have been able to increase distributions across two funds—Pacific Property Fund Limited and PMG Direct Childcare Fund. These increases reflect not only the benefit of an improving interest rate environment but also the ongoing positive leasing activity and property performance within these funds. This progress highlights the collaborative efforts of PMG’s fund management and property teams, who work diligently to deliver the best outcomes for investors.
Looking ahead, we are cautiously optimistic about further increases in distributions across some of our funds this year. As interest rates ease and strong leasing outcomes continue, we see additional opportunities to deliver resilient, sustainable, and growing cash returns and value for our investors. Our approach, however, remains measured, with a clear focus on achieving long-term resilience and meeting our objectives for investors.
A balanced and strategic approach
The current interest rate environment brings both opportunities and challenges for investors. As borrowing costs decline, there is greater potential for increased distributions and portfolio growth. We are focused on navigating these changes with a balanced approach to deliver sustainable value while adapting to economic shifts.
By staying focused and taking advantage of favourable conditions, we aim to position our funds for long-term success, offering investors both stability and growth.
Disclaimer: The information in this article is of a general nature and was current as at 29 January 2025. It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013, and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice on whether or not an investment in one of its funds is right for you. Please seek advice from a licensed financial advice provider before making any investment decisions.
